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UK Government: Personal current account market not working well for
consumers, says OFT
(M2 PressWIRE Via Acquire Media NewsEdge)
RDATE:16072008
The market in personal current accounts is not working well for
consumers, the OFT said today in its report 'Personal current accounts
in the UK' which looks at the GBP8 billion industry.
The report found that much of banks' revenue from current accounts is
derived opaquely, with 81 per cent of income coming from two sources:
insufficient funds charges (GBP2.6bn) and net credit interest income
(GBP4.1bn). A significant number of customers do not know how much they
actually pay in bank charges, either before or after they are incurred.
Over three-quarters do not know the credit interest rate of their
current account, and even those that do lack the means to calculate the
interest they forgo.
The complexity and lack of transparency of personal current accounts
makes it extremely difficult for individual customers to compare their
bank account with other offers. There is thus little incentive for
consumers to switch - especially as people generally believe that it is
complex and risky to switch accounts. Also, when the switching process
does go wrong consumers can find themselves bearing a significant
proportion of the resulting costs. The result is that only six per cent
of customers we surveyed had switched in the last 12 months - one of
the lowest switching rates in Europe.
A further result is that a minority of customers end up paying much
more for their current account than others - for example, in 2006 we
calculate that 1.4m people pay over GBP500 per year in charges. This
can often mean potentially 'vulnerable', low income and low saving
customers paying more as a result of incurring insufficient funds
charges. The effect is not made any easier by a lack of simple
mechanisms for consumers to control or opt out of an unarranged
overdraft.
Overall, the report finds that the personal current account market may
be stuck in an equilibrium that does not work well for consumers.
Limited understanding of key account elements, combined with low
confidence in switching, means that banks have less incentive to
provide better offers on charges and interest. But without better
offers from banks, consumers have little incentive to switch.
John Fingleton, OFT Chief Executive, said:
'Personal current accounts are a vital gateway to effective
participation in the economy. But this market is not serving consumers
well.
'Customers lack the information they need to choose the best deal, and
this in turn weakens the banks' incentives to compete. There is much
the banks could do to improve how the market works, and we hope this
report will encourage them to take steps to do so in the near future.'
In the view of the OFT the status quo is not satisfactory. The OFT will
spend the coming months engaging with banks and consumer groups to try
to achieve greater clarity, transparency and consumer empowerment in
this market, either through voluntary change or, if necessary, through
other routes, potentially including greater regulatory intervention or
a reference of the market to the Competition Commission.
Other findings from the study include1:
* The aggregate revenue of banks from personal current accounts (PCAs)
was approx GBP8.3bn - GBP152 per active account;
* Personal current accounts generate more revenue for banks than
savings and credit cards combined;
* Insufficient fund charges have increased by an average of 17 per cent
in real terms between 2003 and 2007;
* When banks were asked to calculate how much a hypothetical customer
would have to pay in a given scenario (which included exceeding an
agreed overdraft limit), the reported charges varied from GBP0 to
GBP260;
* The average daily unarranged overdraft balance in 2006 was GBP680m.
Paid item and maintenance fees totalled some GBP1.5bn - which would
equate to a return of over 220 per cent on the average balance;
* There is significant potential for slight errors in financial
management to result in hundreds of pounds of charges;
* Over 12.6 million accounts (23 per cent of active accounts) incurred
at least one insufficient funds charge in 2006;
* Those consumers who incurred a charge were more likely to incur at
least six charges than just one;
* Four million accounts incurred charges of over GBP200 in 2006, of
which 1.4 million accounts incurred charges of over GBP500;
* In a survey conducted for the study over a fifth of consumers were
unaware of the existence of charges until they had incurred one.
NOTES
1. The Full Report and Executive summary of the PCA Market Study, the
Consultation Document and further background are available at
http://www.oft.gov.uk/pca
2. The PCA Market Study was launched by the OFT in Spring 2007. It has
been carried out alongside the formal Unfair Terms in Consumer
Contracts Regulations 1999 (UTCCRs) investigation into terms providing
for unarranged overdraft charges (UOD) so that it can inform the
investigation.
3. The UTCCRs investigation began in 2007. The first phase of the test
case was launched in the High Court in July 2007. In April 2008 Mr
Justice Andrew Smith ruled that the UOD terms in banks' personal
current account contracts can be assessed for fairness under the
UTCCRs. In May 2008, the Judge gave the test case banks permission to
appeal his finding. In July 2008 a hearing took place into whether UOD
terms in the banks' historical and basic bank account (and certain
other non-mainstream current accounts) can also be assessed for
fairness under the UTCCRs, and whether they are capable of being
penalties at common law. This judgment is yet to be handed down. The
OFT is continuing to progress the investigation as quickly as possible
and will shortly be writing to the banks with its initial views on
fairness issues.
4. OFT Market Studies are carried out under section 5 of the Enterprise
Act 2002 (EA02) which allows a market-wide consideration of both
competition and consumer issues.
5. While the FSA is the lead regulator for UK banking the EA02 enables
the OFT to assess wider competition issues in a way not open to the FSA.
6. The OFT will now consult about the issues raised by the Market Study
with the banks and other interested stakeholders for a minimum of three
months.
OFT reports and consumer information leaflets are available free from:
1 Revenue data is for 2006
CONTACT: Public enquiries, Office of Fair Trading
Tel: +44 (0)845 722 4499
e-mail: enquiries@oft.gov.uk
WWW: http://www.oft.gov.uk
((M2 Communications Ltd disclaims all liability for information
provided within M2 PressWIRE. Data supplied by named party/parties.
Further information on M2 PressWIRE can be obtained at
http://www.presswire.net on the world wide web. Inquiries to
info@m2.com)).
Copyright ? 2008 M2 Communications Ltd.
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